Understanding Leverage
Leverage is borrowing capital to increase your trading position beyond what would be possible from your cash balance alone. While 10x or 20x leverage can multiply your returns, a tiny 5% movement against your position can liquidate your entire trading account.
The Golden Rule of Risk Management
Successful professional traders never risk more than 1% to 2% of their total trading capital on any single trade. This ensures that even a string of consecutive losses will not ruin your account balance.
How to Manage Risk Properly
- Always use a Stop Loss: Define your exit point before you enter the trade.
- Calculate Position Size: Adjust the number of shares/contracts you buy based on the distance to your stop loss.
- Hedge your Positions: Use defensive instruments to protect against unexpected gaps.